Plight of savers could get even worse as Bank of England considers NEGATIVE interest rates

Plight of savers could get even worse as Bank of England considers NEGATIVE interest ratesDeputy governor Paul Tucker says Bank has discussed radical moveHigh street lenders would have to pay the central
bank to hold their moneyMove could wipe out savings rates and inflation would ravage deposits

By
Rachel Rickard Straus

PUBLISHED:

16:22 GMT, 26 February 2013

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UPDATED:

21:38 GMT, 26 February 2013

Negative interest rates should be considered as an option to encourage banks to lend to small and medium-sized firms, the Bank of England’s deputy governor for financial stability said today.

Paul Tucker said the dramatic move had been discussed at this month’s rate-setting meeting as an option to help fuel economic growth.

Such a move would spell catastrophe for cash-strapped savers, who have already been crippled by rock bottom
rates since the Bank of England dramatically cut the base rate to its record low of 0.5
per cent in March 2009.

The Bank of England has kept the base rate at
the historic low of 0.5 per cent since March 2009, which is now nearly
four years. Right: Bank of England deputy governor Paul Tucker

Cutting it further to below zero would effectively mean
depositors, such as high street lenders, would have to pay the central
bank to hold their money.

The hope would be that banks would therefore choose to lend out more of their funds to small businesses rather than stockpiling it at their expense.

But the base rate is also used by high street banks to set their own interest rates for customers.

There are currently just three savings accounts offering interest rates that beat the current 2.7 per cent rate of inflation: one offers 2.8 per cent, one is disappearing from the market within days and the third is available to a very restricted geography.

New ideas: The Bank of England has considered a negative base rate to encourage lending

WHAT DOES NEGATIVE INTEREST RATES MEAN

Negative interest rates would mean that the Bank of England would start to charge high street banks for looking after their money.

It is considering charging interest on the funds that commercial banks hold on deposit at the central bank in order to encourage these high street lenders to do other things with the money.

The move would be intended to encourage more lending to businesses and households, rather than letting it sit in bank vaults.

If the interest rate was -1 per cent, they would have to pay the BoE a 1 per cent rate each year to hold money with it.

It is hoped that small businesses and house-buyers that have complained that banks are not lending would benefit from the cash injection and it would be easier to get a loan.

But savers could be hit as it is yet more pressure on rates and banks may pass on that pain to customers and slash interest rates.

A negative base rate would likely see savings rates plunge even further, resulting in prudent savers’ nest eggs being eaten away at an even faster rate.

Speaking to MPs on the Treasury Committee, Mr Tucker said: 'This would be an extraordinary thing to do and it needs to be thought through carefully.

'I hope we will think about whether there are constraints to setting negative interest rates.’

He also suggested more bond-buying through the quantitative easing scheme was on the cards and added that the pound may need to weaken more – a comment that pushed sterling to near 2.5-year lows against the dollar.

Banks cut interest rates to make saving less attractive and borrowing more attractive, which in turn stimulates spending to boost economic growth.

However, with the base rate already at 0.5 per cent the Bank is running out of conventional tricks to encourage growth and is looking at other alternatives.

When it cut the base rate to 2009 the Bank judged it could not be reduced below that level.

Instead it has resorted to quantitative easing – which has a similar effect to cutting the base rate of encouraging spending – and has also looked at other policy measures including buying other assets.

It is hoped Mark Carney, who is taking over as Bank Governor in July, will also bring much-needed new ideas to boost the economy.

It would not be the first time a central bank had resorted to a negative base rate. In 2009 the Swedish central bank, the Riksbank, set a rate of -0.25 per cent on its deposit rate.

In December the Swiss bank Credit Suisse implemented negative rates on bank deposits to curb demand for the Swiss franc.